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What we understand of India’s GST

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New Picture (16).pngGST Bill: How it will impact various sectors

Implementation of GST will affect various sectors differently. Grant Thornton offers a quick look at how some of them will fare once the new tax regime comes into effect:

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International Trade : Introduction of GST is likely to benefit the foreign trade. Destination based taxation is a fundamental principal of sound GST. Importers would be taxed at the same rate as products produced and consumed with the jurisdiction. Exporters of goods and services shall continue to be zero rated and will be eligible to claim refund of input tax credit. Hence, both Import substituting industries and Export oriented industries would become internationally more competitive. These will give an impetus to export whereas imports will be expected to register a downfall.

Under the proposed GST, imports shall be fully taxed in India, irrespective of whether the imported goods and services are produced in India or not, thereby, providing a level playing field to domestic producers particularly in the import-substitution industry. This will boost the ‘Make in India’ initiative of the government.

Food & Beverages – also Travel, tourism and hospitality industry:
India’s travel, tourism and hospitality industries have multiple taxes, levied by both the centre and the states. It is expected that under GST, supplies of hotels and restaurants will be subjected to a single tax.

At present, no credit is available on input services related to renovation or construction of hotels and resorts. This is expected to change under GST. R&D cess, payable on franchise fees and technical know-how, is likely to be subsumed under GST, thus simplifying compliance procedures and reducing multiple taxes.

However, it is unclear whether various benefits available under the existing Foreign Trade Policy will continue under GST. If such benefits are provided, input credit may not be available, resulting in higher costs.

On the whole, GST is likely to eliminate multiplicity of taxes and lack of credits. However, it may also lead to increase in tax rates.

Housing & Real estate . If the real estate sector is brought within the ambit of GST, it will result in transparency and possible reduction in tax evasion cases. Transfer of (completed) properties may continue to be outside the purview of GST and be liable only to applicable stamp duties.

In case this sector is brought within the ambit of GST, it is likely to result in transparency, which will significantly reduce tax evasion through more efficient transaction-tracking methods, and improved enforcement and compliance. Since GST may be levied on a single value, the current issue of levying tax on tax (VAT on central excise duty) is likely to be removed.

At present, developers pay various non-creditable taxes on supplies. GST may replace these multiple taxes with a single tax; credit on supplies may also be available, thus reducing costs for all players.

However, if real estate output is exempted, then input GST credit could be a substantial cost for the sector, resulting in blockage of credit and higher costs to end consumers.


Financial services

In India, most of the banking and financial services are exposed to service tax, at the rate of 14.5 percent, while GST is expected to be 18 percent to 20 percent. Thus, services are likely to get costlier.

GST may make things cumbersome as financial service providers may be required to adhere to compliances across multiple states instead of the current single, centralised registration compliances.

Also, as GST is a destination-based tax, it might be a challenge to determine the destination of certain services (at present, services are taxed at the place of rendering the service). This may lead to a difficulty in determining state GST, central GST or inter-state GST on B2B and B2C transactions.

Interest on loans, trading in securities, foreign currency and retail services are also expected to fall within the ambit of GST. Recommendations by the banking industry suggest that such services and income should not come under GST. It is still to be seen whether these recommendations will be accepted.

Insurance products such as life, motor and health, will also get costlier. An Economic Times report quoted Naresh Makhijani, head of financial services, KPMG stating policy holders would end up paying up to 300 basis points more in taxes.

Overall, it appears that imposing GST on banking and financial services may become a challenge and India, if successful, will chart a new course, which could well become a model for the rest of the world.
Health care
One of the major concerns of this industry is the current inverted duty structure that adversely affects domestic manufacturers, cost of inputs being higher than output. This discourages investment in this industry. GST may either remove the inverted duty structure or allow refund of accumulated credit. This would be a boon for this industry and can act as its growth catalyst.

The current cascading tax structure on import duty makes it expensive for the industry to import machinery. GST is likely to reduce this cost.

This sector enjoys several tax exemptions and benefits. It is still not clear whether these benefits will continue under GST. Health insurance and diagnostic centres, which are mainly service-oriented, may fall under higher tax rates, thereby making such services more expensive for consumers.

Alcoholic beverages
Alcohol for human consumption is proposed to be kept outside the GST regime, and will hence continue to attract state excise and VAT; however, inputs are likely to fall under the ambit of GST.

Consequently, there may be blockage of input credit, leading to increased production cost and inefficiency in production and distribution.

Higher input costs and its cascading effect on taxes may push prices upwards, and may also hit exports.

Restaurants and bars serving alcohol, and selling both GST and non-GST products, may be required to undertake dual compliance (for GST and non-GST products).

Auto, Transportation & Logistics:

For automobiles, the effective tax rate in the sector currently ranges between 30 per cent and 47 per cent.

► On implementation of GST the tax rate is expected to oscillate between 20-22 per cent.

► It is expected to drive overall demand and reduce cost for the end user by about 10 per cent.

► The transportation time and the overall cost will be reduced as the goods will be transferred from one state to another by easily surpassing various octroi and check points.

► In addition to this, the cost for the logistics and supply chain inventory will be curtailed by almost 30-40 per cent.
Highlights for the Logistics Industry: The implementation of GST will lead to lower transit time and thereby generate higher truck utilisation.

This will boost demand for high tonnage trucks and lead to overall reduction in transportation costs.

It will facilitate seamless inter-state flow of goods, which is expected to directly accelerate demand for logistics services.

Impact: The logistics sector is largely fragmented and comprises many unorganized players. Several players in the unorganised sector avoid tax which generates a cost gap between them and the organized players.

With the GST coming into picture, we expect an overall positive impact, with a reduction in the cost competitiveness as all the players will be brought under a uniform tax base, thereby improving growth opportunities for the organized players.

Telecommunication:
Telecommunication India is one of the biggest telecom markets in the world. It has the third-largest telecom network in the world and the second-largest among the emerging economies. The revenue of the sector is either subject to service tax or VAT.
More significantly, there has been the continuous and ongoing problem of double taxation of the telecom services themselves, from both a VAT and a service tax standpoint. Specifically, the taxation of SIM cards, prepaid cards etc. has been a problematic area for a very long time. Hence, with the integration of VAT and service tax into the GST, this problem will be resolved to a great extent.
Thus, with GST coming into force, it will be essential to ensure the availability of seamless input tax credits across goods and services for this sector so that the ultimate tax on the consumption of such services is kept low.
There have been conflicting judgements with different perspectives of taxation of intangibles under the indirect tax laws, whether it should be regarded as “Service” and charged to service tax or be regarded as “deemed Sale – transfer of right to use the same” and charged to VAT. This controversy will also be resolved with the introduction of GST.
Education 
The education sector currently enjoys various tax exemptions and benefits; services provided by schools and colleges are either not taxed or are covered in the negative list.

The situation is likely to continue even after the implementation of GST. In case it doesn’t, the sector may be able to avail of input credit or CENVAT credit on the duty paid on purchase of inputs and services. These are likely to bring down the final cost for the industry.

 

The Key Imperatives for Companies & Sectors are:

  • Continually track policy developments regarding GST and update prepared scenarios.
  • Identify any areas of adverse impact and prepare contingency measures.
  • Identify issues and concerns needing representations to the authorities and develop a strategy for effective advocacy.

 

POLICY DEVELOPMENTS ROADMAP:

 

The draft GST bill was officially released in the public domain to invite comments from stakeholders.

It shows the effort on the part of lawmakers to codify most of the indirect tax laws of the country in a single place, and introduce concepts like ‘supply’, ‘business segments’, ‘continuous supply of goods’, ‘place of supply rules’, and specific provisions for ecommerce operators.

 

 

 
AREAS OF IMPACT:
Sourcing ·         Inter-State procurement could prove viable

·         This may open opportunities to consolidate suppliers/vendors

·         Additional duty/CVD and Special Additional duty components of customs duty to be replaced.

Distribution ·         Changes in tax system could warrant changes in both procurement and distribution arrangements

·         Current arrangements for distribution of finished goods may no longer be optimal with the removal of the concept of excise duty on manufacturing

·         Current network structure and product flows may need review and possible alteration

Pricing and profitability ·         Tax savings resulting from the GST structure would require repricing of products

·         Margins or price mark-ups would also need to be re-examined

Cash flow ·         Removal of the concept of excise duty on manufacturing can result in improvement in cash flow and inventory costs as GST would now be paid at the time of sale/supply rather than at the time or removal of goods from the factory.

 

System changes and transaction management ·         Potential changes to accounting and IT systems in areas of master data, supply chain transactions, system design

·         Existing open transactions and balances as on the cut-off date need to be migrated out to ensure smooth transition to GST

·         Changes to supply chain reports (e.g., purchase register, sales register, services register), other tax reports and forms (e.g., invoices, purchase orders) need review

·         Appropriate measures such as training of employees, compliance under GST, customer education, and tracking of inventory credit are needed to ensure smooth transition to the GST regime

  • UPDATED: India moved a step closer to the implementation of the Goods and Services Tax (GST) regime, as its Parliament’s Upper House, the Rajya Sabha, approved The Constitution (122nd Amendment) Bill, 2014 with 203 votes in favour and none against.

    The GST, which is expected to be implemented from April 1, 2017, aims to replace multiple state and central levies with a single tax. Since the central and state taxes are likely to be subsumed under GST, it may result in fungibility of tax credits across intra- and inter-state transactions. Consequently, different industries may need to conduct a cost-benefit analysis in terms of applicable input and output taxes.

    SALIENT FEATURES:

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  • The power to make laws in respect of supplies in the course of inter-State trade or commerce will be vested only in the Union government. States will have the right to levy GST on intra-State transactions including on services.
  • Centre will levy IGST on inter-State supply of goods and services. Import of goods will be subject to basic customs duty and IGST.
  • GST defined as any tax on supply of goods and services other than on alcohol for human consumption.
  • Central taxes like, Central Excise duty, Additional Excise duty, Service tax, Additional Custom duty and Special Additional duty and State level taxes like, VAT or sales tax, Central Sales tax, Entertainment tax, Entry tax, Purchase tax, Luxury tax and Octroi will subsume in GST.
  • Petroleum and petroleum products i.e. crude, high speed diesel, motor spirit, aviation turbine fuel and natural gas   shall be subject to the GST on a date to be notified by the GST Council.
  • Provision for removing imposition of entry tax / Octroi across India.
  • Entertainment tax, imposed by States on movie, theatre, etc will be subsumed in GST, but taxes on entertainment at panchayat, municipality or district level to continue.
  • GST may be levied on the sale of newspapers and advertisements and this would give the government’s access to substantial incremental revenues.
  • Stamp duties, typically imposed on legal agreements by the state, will continue to be levied by the States.
  • Administration of GST will be the responsibility of the GST Council, which will be the apex policy making body for GST. Members of GST Council comprised of the Central and State ministers in charge of the finance portfolio.

ADMINISTRATIVE MACHINERY:

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THERE IS A HUGE ROLE FOR CORPORATE LEGAL & FINANCE PROFESSIONALS

  • Evaluate the impact on own industry –  inputs supplier and output procedures
  • Input VAT credit on stock on the date of transition to GST
  • Contracts already entered and partly executed stock on the date of transition to GST
  • Registration ,consolidation in the respective states
  • Pending assessments and refunds
  • Capacity building and training to staff
  • Update the accounting software
SYSTEM challenges:

– One factor that will impact the success of GST is the robust IT backbone connecting all state governments, trade and industry, banks and other stakeholders on a real-time basis. The government has already incorporated an SPV viz. – Goods and Services Tax Network (GSTN), which has to develop a GST portal – front-end system for trade and industry and back-end system for all government agencies. GSTN will ensure technology support for registration, return filing, tax payment, IGST settlement, MIS and other dashboards on GST portal to all the stakeholders.
-For effective implementation of GST, tax administration staff – both at central and state levels – would require to be trained properly in terms of concept, legislation and procedure. The tax administration staff would also need to change their mindset, approach and attitude towards the tax payers. And for this, they would have to ‘learn, unlearn, and relearn’ the GST not only in letter but in spirit too.

FOR GOVERNMENT- GST COUNCIL

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FOR GOVERNMENT- Infrastructure issues: 

  • Human resources of the implementation department
  • IT infrastructure
  • Cross verification of documents
  • Common dispute resolution mechanism
  • Common procedure for levy, assessment, collection and appropriation
  • Training and rollout process for states

FOR GOVERNMENT- Operational issues: 

  • Common processes for assessment and returns for all states
  • Improving operational relations between center and state
  • Sharing of information using comprehensive IT network
  • Monitoring of inter-state trade

FOR GOVERNMENT- GST COUNCIL WILL MAKE RECOMMENDATION ON :

  • Exemptions
  • Model GST laws, principles of levy etc..
  • Rates and special rates
  • Date on which GST to be levy on crude, high speed diesel ,petrol, aviation fuel etc..
  • Special provisions for northeast and J&K etc..
  • Parliament will have to pass legislation for CGST and IGST
  • All states and UT s will have to pass SGST
  • Dates of implementation of all these acts to be negotiated and synchronized

 

ROLE OF LEGAL AND FINANCE PROFESSIONALS:

  • Track policy developments
  • Feedback on draft legislations and impact analysis
  • Industry preparedness
  • Implementation assistance
  • Tax planning-revaluation of tax liabilities and credits
  • Record keeping changes and their audit
  • Restructure supply chain management
  • Special focus on principle of destination
  • Competition analysis
  • Review of existing contracts
  • Export management
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